Do Yourself A Favor: Care Less About the Stock Market

If you’re reading this you probably own stocks. Most readers of this financial publication do, directly or indirectly— usually through a brokerage account or through a pension or retirement account such as a 401(k).

Stock ownership seems as if it’s nothing special these days. Everyone appears to be in the game. And because everyone feels like a player, there is enhanced emphasis in the media on the stock market. In turn, many of us gauge how the economy is doing or will do based on the market’s value – even though we know we probably shouldn’t.

As a result, our collective spirits rise and fall on the market’s moves every trading day. Investors felt last year was great. If your measurement is the S&P 500 Index, then yes, 2013’s 30% gain was cause for celebration. The recent 4% decline? Get nervous and, maybe get out.

The market is really just a yardstick of our confidence, right?

Actually, no.

That’s because most of us who own stocks don’t hold a much and most people don’t own any stocks at all.

How is the market a reflection of this silent majority?

The reality is that stocks are not only owned by a minority of Americans, but by a minority of that minority – and a very wealthy minority at that.

It’s true that during the 1980s and 1990s participation in the stock market rose sharply. Research by Jack Favilukis at the London School of Economics in 2012 noted that stock market participation through 401(k) plans and individual retirement accounts rose from 30.6% in 1983, to 43.9% in 2004, and stabilized at 40.6% in 2007.

And just a thought on those retirement accounts: The vast majority are run passively. We park money there and let some index or a well-paid fund manager do the lifting.

Of that group, as we all know, the majority of stocks are held by the wealthy. Pew found that 77% of college graduates own stock and 80% of families with an annual income of $80,000 or more. After that stock ownership falls off significantly to just 55% for middle-income families to finally just 25% of those with a high school diploma or less, and just 15% of families with an annual income of less than $30,000.

The wealthiest 5% of Americans own 82% of directly owned, publicly traded stocks, according to the Federal Reserve.

Mr. Favilukis concluded “changes in inequality are correlated with stock returns” and that “stock market participants are on average richer and benefit disproportionately from a stock market boom.”

The takeaway from this should be obvious: The stock market reflects confidence, but it’s the confidence of mostly a few wealthy people, or, more likely, the brokers and financial advisers of a few wealthy people. And because they are the main players in the game, they are essentially playing with one another and pulling the rest of us around.

They, after all, control the bulk of trading and market sentiment. (There is, of course, computerized high-frequency trading as well, it comprised about 51% of the market volume in 2012, according to Tabb Group. HFTs supposedly are inert. Advocates say they just add liquidity and generally don’t move stock prices significantly. Let’s hope algorithms don’t think, or if they do, we don’t base our economic confidence on them.)

The problem with this unbalanced participation between rich players and poor non-players is that we tend to view the stock market as a collective barometer of economic confidence. And this measurement can have two possible outcomes.

First, is the cart-before-the-horse effect. In this scenario, those who don’t directly participate in the market are so influenced by market coverage or people who follow it they tend to set their own confidence based on what market participants do. If the market’s up, they feel good even if they don’t see a direct benefit.

The second scenario, and the one I suspect is most likely, is that most people who don’t own stocks don’t care. They have their own experiential views of the economy and they diverge from the stock market’s rallies and corrections.

For instance, during the last year the University of Michigan Consumer Confidence Index rose in line with the S&P 500 Index. In August the indexes were up 15.3% and 13.4% respectively. Then they diverged sharply. The consumer measure was up just 0.81% for the year on Oct. 31, while the S&P had rallied 16.4%. during the same period.

Likewise, the Gallup U.S. Economic Confidence Index has fallen from -2 last May to -21 this week, almost opposite the rally see in U.S. stock markets.

In other words, investors’ enthusiasm built while consumers’ optimism fell back.

So, in the end there are two camps: those with or without stocks who follow the market or are influenced by it and those who don’t own squat and probably care about Dow 16,000 as much as they did about Dow 6,000. Not much. I’d argue that the care-less camp is much bigger — and probably can live without manufactured stress.
Ultimately, neither side is right or wrong. We just need to keep in mind who exactly is pushing and pulling stock prices up and down. The greed or fear of the wealthy may make the front page of the newspaper every day for good reason. Money has influence.

But for a majority of Americans the stock market really isn’t as important as we sometimes like to think it is. That’s OK. From my point of view, as long as you keep reading.